Prior to the events of 2020, Chicago had been ticking off the right economic boxes. In the first quarter of last year, unemployment fell by almost a full percentage point to 4 percent, the area’s best unemployment rate since the 13 percent high water mark of 2009.
Job creation is one of the best indications for the health of a commercial real estate market. This particular job growth, however, harkened back to what made Chicago a powerhouse since its founding as the manufacturing sector added more than 8,000 jobs, just from 2018 to 2019.
That was then, however. The record-long development cycle that grew out of the 2008-2009 Great Recession came to sudden halt when the COVID-19 crisis caused market turmoil earlier this year. Overall economic recovery is difficult to predict as we are still in the midst of the pandemic; one thing is for sure, however—the industrial asset class has only been aided by the turbulence of 2020.
The main impetus for this is, of course, a resurgence in online shopping. With consumers unable or unwilling to visit brick-and-mortar retail stores, they instead turned to their computers. E-commerce, and the resultant demand for warehouse space, had already been a disruptive force in industrial real estate but this kicked the phenomenon into a higher gear.
“Absorption in the industrial market this year has been dominated by Amazon as people shift to a higher percentage of purchases through e-commerce websites,” said David Conroy, principal and industrial specialist at Cawley Chicago. “If this were to continue as the trend it would be a little concerning to have the market dominated by one group that may pull back their break-neck expansion at some point.”
Amazon was responsible for two of the top five industrial leases that Cawley tracked over the twelve months ending in Q3 2020. The Seattle-based e-commerce giant took more than 1 million square feet at 23257 S. Central Avenue in south suburban Monee, Illinois, as well as another 811,000 square feet near Joliet at 30260 S. Graaskamp Boulevard in Wilmington, Illinois. Looking to bolster its omnichannel offerings, Target also took 1 million square feet of e-commerce-related space at 3501 S. Pulaski Road in Chicago.
“The good news is we’ve seen a lot of local business in various industries with footprints of 30,000 to 50,000 square feet come back into the market,” said Conroy. “They’ve been sitting on their hands since March and have reached an impetus where there is pent up demand to do something in the way of expansions.”
Another trend during the pandemic has been a shift in the food supply chain. Unable to dine in restaurants as they had in the past, consumers are ordering food to go or for delivery, as well as increasing their grocery store spend. Pactiv, a manufacturer of disposable food packaging, took 787,499 square feet at 1101 W. Airport Road in Romeoville, Illinois this March. While the genesis for this deal preceded the pandemic, it very likely has benefitted the firm since.
“I think the continued growth of Amazon, along with local businesses getting back in the mix and Fortune 500 companies looking to insulate their supply chains from global disruptions, really point to a strong 2021 and I think even stronger 2022 as some of these supply chain re-organizations start to reach the execution stage,” Conroy said.
Investors are showing a steady appetite for industrial properties—when owners are willing to sell. According to Cawley Chicago data, the average cap rate on industrial assets that sold in the 12 months ending in Q3 2020 was 8.8 percent. The average price per square foot during the time span was $72 and well-leased properties remained hot as the average vacancy at sale stood at 10.1 percent.
Shifts in property values and an increase in local industrial business production has led to a ramp-up in need for industrial space. Further, demand for industrial product is not limited to land near O’Hare or the intermodals, as industrial space in the city has remained attractive since the initial stages of the quarantine.
“We are seeing continued strong interest from investors looking to plant their flag or expand their infill and last-mile footprints,” said Frank Melchert, principal and industrial specialist at Cawley Chicago. “We are seeing high demand from both tenants and purchasers alike.”